Saturday, March 30, 2013

I read the obituary of Ray Williams in the March 25,
2013, issue of the New York Times.A
talented basketball player, Ray Williams started his career playing for the New
York Knicks and later for the New Jersey Nets. He also played for the Celtics,
the Atlanta Hawks, and the San Antonio Spurs. As the article mentioned, “he had
an outstanding shooting touch, he possessed superb body control, and had
dazzled the crowds at Madison Square Garden in the late 1970s and early 1980s.”
By the time his NBA career ended, he had accumulated impressive
statistics.His private life after he
stopped playing is another story. While Williams had earned millions during his
career, he declared bankruptcy in the mid-1990s, his marriage broke up, and by
the summer of 2010 he was homeless, living in his car in Florida. After he
talked about his problems in an interview with the Boston Globe, he received an
offer from the mayor of his native Mount Vernon, New York, to work with
youngsters at a recreational center. A former teammate interviewed for the
article noted that “Williams flourished on the court but, like many athletes,
was not prepared for life after the game.”

Williams’s story is surprisingly similar to that of
many other athletes. Successful, skillful, and with impressive records, many
athletes end up in bankruptcy courts, sometimes as soon as two years after they
stop playing. Money mismanagement seems to be the norm, even if players, as in
the case of Williams, had earned millions of dollars in their career. But the career
of a professional athlete is short; they are lucky to be active past age 35.
Their professional skills are many but do not necessarily translate into
opportunities for jobs after they stop playing.

There are powerful lessons in these stories. First,
skill, talent, and intelligence are not enough to manage finances. Incredibly
successful athletes are able to do things that are unimaginable for the rest of
us (I, for one, am so inept in basketball that I once fell on my face while
trying to dunk a ball; I was alone on the court, so I could not even blame a
teammate!) but they cannot necessarily be expected to be as skillful at managing
money. While many people believe managing money is not rocket science (I am
afraid it is), we need more than general skills to deal with high earnings, especially
when those earnings last for only a few years. Second, while we recognize the
importance of training to success in the game (and in any job, really), we tend
to give less thought to how be successful in other parts of our life, such as
managing our finances, which is equally important given that at a certain point
we will stop working at our successful (or unsuccessful) jobs and need to
support ourselves.

There is a little bit of Ray Williams in all of us.
How many of us have planned for the future so as to be able to support ourselves
after we stop working? This is something that most people don’t start to think
about until they reach middle-age. Fortunately, regular jobs last for a long
time and we can earn income over a long career. But for professional athletes
whose careers are very short, a lot more preparation is needed for “life after
the game.” Three suggestions come to mind. Let’s make sure that athletes
graduate from college so they have a degree they can rely on after they stop
playing (Ray Williams did not graduate from Minnesota, where he studied after a
year at San Jacinto Junior College in Texas). Let’s add money management to
their courses before they go pro. We all need those courses, but the athletes
even more! Finally, let’s create programs for professional athletes so that when
they stop playing they can use their fame, skills, discipline, outstanding
shooting touch, and superb body control to dazzle in their new jobs.

All of us who cannot dunk without being hurt would
enjoy seeing our heroes do well both on and
off the basketball court.

Friday, March 22, 2013

The American Academy of Arts and Sciences convened a group of experts on
Thursday and Friday of last week, March 14-15, in Cambridge, Mass. The
title of the conference was “Financial Literacy and the Educated American.” As
you know, the Academy is one of the nation’s oldest learned societies, and
during the reception on Thursday night, the President of the Academy guided us
through parts of the building, showing us some of the acceptance letters which
are framed and posted on the walls, including one by George Washington. I
thought it was good omen and that all of these wise historical figures would
inspire and watch over us at the meeting.

A special meeting it was. The caliber of the participants was extraordinary.
We had members of the President’s Advisory Council for Financial Capability,
the Assistant Secretary of Labor for the Employee Benefits Security
Administration, the head of the Government Accountability Office, the President
of FINRA Investor Education Foundation, and the heads of some of the top
not-for-profit institutions working on financial literacy. The conference
convened some of the top academics in the country, including the dean of one of
the best business schools in Europe. We also had fellows of the Academy who
work in the private sector and the CEO of a firm. These people normally do not
meet in a single place, but the Academy was able to bring all of them together.

The invitation letter outlined the intent of the conference: “Recent
financial crises in the US and abroad have highlighted the urgent need for an
increased focus on educational and policy initiatives designed to promote
financial literacy in citizens of all ages. To address this need, the American
Academy of Arts and Sciences will convene a nonpartisan forum for diverse
experts from academic, financial, private nonprofit, and government
institutions to share theoretical approaches, best practices, and research
methods and findings. The conference will focus on the beginning and end of the
financial life cycle of American citizens in order to emphasize the necessity
for sustained fiscal education from kindergarten through retirement.”

I co-chaired the first panel, Financial Education
over the Life Cycle. We had a rich set of presentations and discussions in
that panel and throughout the day. New ideas percolated and bounced around from
presentations to discussions, and I kept an ear out for what could be
implemented and could make a good next step for this extraordinary group. The
importance of financial education in schools could not be overstated, and there
was a lot of discussion about content, standards, implementation, and whether
to add financial literacy questions to the SAT. There was a very engaging
discussion about workplace financial education as well and what the government
can do in this regard, given that it is one large and very important employer.

Our lunch speaker was the Chairman of the President’s Advisory Council and
CEO of Ariel Investments. He spoke with simplicity, describing how the Ariel
Community Academy in Chicago was created, how the students there manage a fund
with the help of advisors from Ariel Investments, and how proud he was of it.
He started that initiative many years ago and I am pretty sure without having
any studies using control and treatment groups demonstrating that financial
literacy works in schools (what we all want to see today). He did not mention
it, but today the Academy outperforms all schools in the district and is ranked
as one of the top elementary schools in all of Chicago. He also helped
McDonald’s put in place financial education programs so that employees, in
particular minority employees, could save more for their retirement. He had
seen data about disparities in saving among African Americans and Hispanics and
thought it was important to address that. Again, I do not think he had seen
studies showing that workplace education works, but what important was to
address a problem. I asked him what motivated his work. He replied that his
father had given him stocks as a Christmas gift; that started his journey. I
forgot to eat lunch when he spoke. He is a person with a vision, someone with
the capacity to look into the future, which is critical when one is dealing
with education.

But back to my panel. In my twenty years of work, I had never chaired a
panel with the CEO of a company. But I did so at this event and I hope I will
be able to do it again. I do hope that this conference was just the beginning of
a conversation and partnerships among the public and private sectors. In a time
of tight budgets, it is important to take leadership and have a vision of what
academics, not-for-profits, and the private sector can do together to combat
financial illiteracy.

Despite much enthusiasm for financial education initiatives, there were
doubters and skeptics at the event, too. Some said we lack data. Others said we
lack evidence. I hear such comments over and over at every conference I go to,
and—true to form—one conference participant stated, “We do not have any
evidence that financial education works.” Dorothy Wallace, a mathematician from
Dartmouth, leaned toward me and whispered, “We do not have any evidence that
ignorance works.” So, I would say we are even. I look forward to the next
steps.

Friday, March 8, 2013

Today is International Women’s Day and I want to
write a blog about a topic that has occupied a lot of my research in the past
few years: gender differences in financial literacy. Starting from the very
first paper I wrote on financial literacy, I found over and over that women
were less likely to answer correctly to financial literacy questions. I did not
focus on that finding until more recently, when I performed an international
comparison of financial literacy. I found the same finding in as many as eight
countries: women were less likely to answer correctly to the same financial
literacy questions I had asked in the United States. And strikingly, in
countries as different as Sweden, Italy, Japan, Russia, the Netherlands, New
Zealand, and Germany, women answered in the same way to the financial literacy
questions: they said they “did not know” the answer to the questions (the paper
is posted on-line at: http://www.financialliteracyfocus.org/alusardi/Papers/FLAT/FLat_World.pdf
).

I remember sitting in front of my computer and
looking at the papers that became part of a special issue of the Journal of Pension Economics and Finance
and comparing the tables across so many countries. It was so clear, so
stunning, so evident; yet I had not seen when I considered the data from one
country only. It took that comparison, which was done for a completely
different set of reasons, to unveil that striking gender difference in
financial literacy.

The finding can be interpreted in different ways and
this is what my current research is exploring. First, women may simply be aware
of their lack of knowledge and they are willing to admit it. This is consistent
with some of my other data that show that women tend to give themselves low
rating when assessing their financial knowledge. So, women know that “they do
not know.” This may, in fact, be the first step to acquire or want to acquire
knowledge. Second, women may have financial knowledge but are less confident in
their knowledge and are less willing to guess or choose an answer when they are
not sure it is the correct one. Some may view this attitude as a drawback, but
I see it as a potential advantage. It takes gut to admit one does not know or
does not know enough. Humility in the world of finance may give better results
than being bold, assertive, and.. well wrong. In case you did not notice, we
have experienced a lot of that in the past few years. Third, women may be less
comfortable with the jargon that is used in finance. We assume that people know
the technical financial terms, few bother to explain them, but most people do
not have a clue about what inflation, real interest rates, and risk even mean,
and women are willing to say “I do not know.”

What makes this result so important is that women
may be the ideal target for financial education programs. Why attend such a
program when one thinks he/she knows (according to my findings, only one third
of the population has a very basic knowledge of financial literacy; believe me,
that program is so much needed!). Many studies have found that women are not
only more likely to attend financial education programs (in the program that I
myself run, the large majority of participants were women), but women are also
more likely to change their behavior after attending the program.

In summary, empowering women with the financial
knowledge, the confidence, the terms that are used in finance could be a
powerful tool; women may willing to use it. Happy International Women’s Day.

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About Me

Annamaria Lusardi is the Denit Trust Endowed Chair of Economics and Accountancy at the George Washington School of Business. Previously, she was the Joel Z. and Susan Hyatt Professor of Economics at Dartmouth College. She has taught at Dartmouth College, Princeton University, the University of Chicago Public Policy School, the University of Chicago Booth School of Business and the Graduate School of Business at Columbia University. From January to June 2008, she was a visiting scholar at Harvard Business School. She has advised the U.S. Treasury, the U.S. Social Security Administration, the Dutch Central Bank, and the Dartmouth Hitchcock Medical Center on issues related to financial literacy and saving. She is the recipient of the Fidelity Pyramid Prize, awarded to authors of published applied research that best helps address the goal of improving lifelong financial well-being for Americans. She holds a Ph.D. degree in Economics from Princeton University.